Global Trading | May 15, 2013Leopard
Capital Fund Manager, Thomas Hugger of Leopard Asia Frontier Fund and Managing
Partner of Leopard Capital LP, goes through some of the major difficulties
faced in various frontier markets in Asia.

In
the frontier markets, even though you have electronic data services such as the
internet, social media, and Bloomberg, it is very difficult to get financial
papers or balance sheet papers, and other fundamental papers for some of the
companies in these locations. Even if you go to Bloomberg and search on Bangladesh,
you don’t have the balance sheet there. If you go into Bloomberg and look at
Mongolian stocks, you will often find the price, but the description says, “The
company currently has no available information on their current line of
business as of 08/2008”. These are often blue-chip companies, and sometimes we
have visited them or we have networks there, but there is limited information
available.

But this is frequently because business is based
on a more personal note, and I would say physical representation gives a big
advantage. Our strategy on the private equity side complements this, so
everywhere we have firms, we have offices. So we have an office in Cambodia, we
have an office in Laos, we have an office in Haiti. When we are successful in
fundraising for Myanmar and Bangladesh, we will have offices there too.

For private individuals it is still very
difficult to invest in these markets. Go to a private bank in Hong Kong or
Singapore, tell them you want to buy stock in Laos or even Vietnam and they
will often tell you “Oh we are sorry, we cannot execute”.

Even for the institutional funds, including the
bigger ones in some of the smaller markets, many still cannot trade because
there are some restrictions, one of the main issues is they have no international
custodians. That’s why the big guys often cannot invest in Laos, Cambodia,
Mongolia or Papua New Guinea.

Principal difficultiesThe hurdles start from very basic things, when last year I made my first trade
in Mongolia, I called up the firm I wished to trade with. It was very difficult
to reach a person because the fixed line was poor. So I had to call a mobile. I
placed the order and I had to confirm it by email. There are some rules in
Mongolia that mean that the broker can only place the order in the system if he
has it written and signed, and it has to be on an order slip and the client has
to sign it. So the broker sent me print-outs of the order sheet, which was in
Mongolian. Then I had to sign it and to scan it and email it back and then the
order was placed. In some markets people compete for nano-seconds, and this
trade took me hours.

An execution in Papua New Guinea takes sometimes
two, three days. I often need to call the local broker to chase them up.
Sometimes the brokers don’t execute orders and say “Oh no, it was not done
today”. So I have to wait for a week or even sometimes a month just to execute
small tiny purchases. Of course in Papua New Guinea don’t call them in the
afternoon; they are probably not in the office.

Then also in Mongolia, the fee I paid for the
first broker was somewhere around 5% in commission and government fees. So I
went there found another broker who gave me considerably cheaper executions. In
international terms it is still outrageously expensive. Then it took me about
four months until I had all the papers process done and when I asked for trade
reports I would just get an email saying what I had bought. In this situation
there was no contract, nothing, so I requested a contract note. I was probably
one of the first foreign institutions for them, so I sent them examples of
contract notes and what I expect for my fund, and within 24 hours I had the
notes.

Execution painsIn Mongolia, I don’t have live prices on Bloomberg, so I found a website that
has a five minute delay. I always check the prices online and I always place
limit orders because the spreads can be more than 100%.

The daily turnover in Mongolia is less than
US$100,000 and there are maybe one or two liquid stocks and the rest are just
super illiquid.

There are also some capital controls, for example
in Vietnam, before the broker can execute a trade he calls my custodian and
determines a limit. Then the custodian will give the broker his limits and then
he can execute. For each broker I have to designate the people, the name and
phone number, ID number or fax number of who can ask for the limits in order to
get the approval from their custodians.

In Mongolia or Vietnam or in other markets, I
cannot sell stock and then buy with the profits, as I am required to wait until
the money hits the account again.

One big hurdle is that, for foreign investors it
is not easy to access these markets. For me as an emerging fund it is worth it
and I went through the pain. It takes months until we have all custodians and
brokerage accounts set up.

There is also a problem with ID markets, because
if you go to London or New York, you don’t need an ID, you just have an account
somewhere and your bank will get a broker and so on. But it is an
administrative hurdle and I don’t understand why these exchanges add this pain
for foreign investors. Although I think it is also not only the exchange, it is
flowing down from the regulator.

Difficulties in opening accountsIn Vietnam it took me seven months to get a trading licence. There is no
standardisation of the process between any of these markets. When you have to
go back and forth it can take a long time.

For example, to open an account for Pakistan I
went to the Pakistani Consulate here in Hong Kong with all the documents and
they said they cannot do it because my firm is registered in the Cayman
Islands. I went about 10 times to the Pakistan Consulate and finally they made
an exception.

Some of the brokers have asked for extensive
information to open an account and this can prove very time consuming.

On the other hand, a Pakistani guy with a
brokerage, one of the leading companies, came to my office and he asked, “Do
you mind opening an account with me?” I said, “Hey listen I’m going through
this with such a pain with all the brokers. I don’t want to do this process
again I’m nearly at the end of the tunnel”. Then he said, “Okay, listen give me
your certificate of incorporation and the MMA of the funds and I promise you it
will take two days”. And two days later the brokers account was opened.

In Vietnam, the document has to go to the Cayman
Islands, they have to be notarised. Then they have to be sent to the Vietnamese
embassy in London to be consularised. It then goes to Singapore to the
custodian and the custodian sends it to Vietnam. So the whole process costs $2,000
for two stamps.

Now my fund administrator gives a lot of pain to
some of the brokers, because the fund needs a monthly statement of my
transactions which is proving to be quite a lot of work. and it is a big
learning curve.

Chances of reformLook at Laos, it’s a communist country. Laos and Cambodia, Cambodia has one
stock at the moment and Laos has two. People go to Thailand where it’s a free
country. You don’t need an ID, but in Cambodia and Laos, you do. So they are
investing a lot of money in technology and people and they don’t make money.Then you consider the ASEAN link and from a commercial point of view, those
countries don’t have a stock exchange. It took Cambodia three or four years to
get it off the ground. I don’t know how much money they sunk into this project
and with the link it could limit trading in this market.

The big stock exchanges are in Thailand and
Singapore. But even Thailand today has currency restrictions so you can put
money in easily, but if you try to move money out it’s very difficult,
especially in large amounts. It also makes it more difficult for people in Laos
to trade stocks in Thailand or in Singapore, because they need to buy the local
currency.

Lately Emerging and Frontier Markets have
underperformed Developed Markets and this provides an excellent entry point
since these markets are historically seen as not expensive.

The trading facilities are often inefficient, but
when you look at the stock market valuations: some stocks are overpriced but
also a lot of stocks are trading below our “fair value model” or even below net
cash (most of these companies are growing faster than listed companies in
developed markets).

However, while some of the trading facilities are
inefficient, in terms of stock market valuations: some stocks are overpriced,
but a lot of stocks are trading below our “fair value model” or even below net
cash (most of these companies are growing faster than listed companies in
developed markets), which is a clear opportunity.

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About Leopard Capital

Leopard Capital was founded in 2007 by Douglas Clayton to manage private equity funds in frontier markets. In Leopard launched Cambodia’s first fund in the depths of the 2008 global financial crisis, and in 2012 created Haiti’s first fund after Haiti’s capital region had been devastated by an earthquake. Leopard’s on-site investment teams work closely with portfolio companies to build market leaders in basic sectors such as renewable energy, food processing, water, telecoms, and financial services.

Leopard Capital LP is domiciled in the Cayman Islands and has offices in Cambodia, and Haiti.